Magic Money Ponzi Scheme

Nov 7, 2021
7 min read

“Sometimes I think the Central Bank will keep printing money until we run out of trees” - Jim Rogers

In this article, we will look at how the Federal Government influences the money supply as we expose this infamous Ponzi scheme. Federal Government spending can be financed in several ways. They could potentially raise income taxes, but that would not be the best idea. They could cut spending and funding in various government sectors but that may cause social unrest by the groups that were cut off. Or, they could increase the budget deficit and finance expenditures at the cost of increasing our already growing national debt. In other words, the government can influence the currency supply by printing more currency to stimulate the economy. You might think that printing currency could be the answer in solving all of our nation’s monetary debt problems, however, printing more currency will just make inflation worse!

The following outlines the currency creation process:

Creation of Treasury Bonds aka IOUs
Open Market Operations (purchasing of the treasury bonds)
Distribution of Currency to Government Agencies
Banks Create more Currency (via fractional reserve lending)
Taxes (income tax paid to the IRS are used to pay back the US Treasury)
Debt Ceiling Delusion (not enough currency to pay down the debt system
Investor Payout (private and secret investors are paid dividends)

Creation of Treasury Bonds aka IOUs

The first step in this process is the creation of treasury bonds which is also known as IOUs. Whenever there is a need to fund or pay for “something”, politicians, government officials, etc will vote to spend more than its income (deficit spending). To pay for that deficit spending, the US Treasury borrows currency by issuing a US treasury bond.

A bond is a fixed income instrument that represents a loan made by an investor which typically is a corporate or government entity. The bond includes the end date when the principal of the loan is due to be paid to the bond owner and includes the terms for variable or fixed payments made by the borrower. Simply put, a bond could include loaning a million dollars to a corporation and over a 5 year period, the corporation will pay back the million dollars including interest. Treasury bonds are considered our national debt because they are set up to be paid back through future taxation.

Open Market Operations

Once the treasury bonds are created, an open market operation is held where banks and large financial institutions purchase the treasury bonds. The banks act as middlemen and sell the treasury bonds to the Federal Reserve at a profit. The Federal Reserve then writes a counterfeit check to the bank paying for the bond. The process then repeats itself where the banks then take the currency that was given to them by the Federal Reserve and buy more treasury bonds at the next treasury auction.

The Federal Reserve Bank of Boston quoted “When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.”

The federal reserve is not a government entity and does not have any money in the federal reserve’s bank account. When they write a check to pay for these bonds, it is magically creating currency.

To recap, the Federal Reserve and US Treasury are just swapping IOUs and using the bank and financial institution as middlemen. With this process repeating itself, currency is magically created into existence. This enriches the banks and in-debts the public by raising the national debt. The end result is that there will be a collection of US Treasury bonds at the Federal Reserve and currency at the US Treasury.

Government Spends/Distribution of the Currency

Once the government has the currency, they simply spend it before it gets circulated into the economy. This means they deposit the newly created currency to various branches in the government such as public programs, social programs, defense/war, infrastructure, etc. Government employees, contractors, military personnel are then paid by the government and deposit their pay in their bank accounts. While you may think that you are safely depositing your currency in the bank, the bank has other plans. Within certain legal limits, the banks can invest in the stock market or loan it out to others for a profit.

Banks Create More Money

As mentioned above, the banks have within limits to do what they want with your currency. While ratios do vary, banks are allowed to reserve only a fraction of your deposit and loan out the rest. Let’s walk through this example.

ACME Bank has a reserve ratio of 10%.
Bob deposits 10,000 dollars into his bank account.
Since the reserve ratio is 10%, ACME Bank can legally take 9,000 dollars and loan it out to Mary without notifying you.
ACME Bank is required to hold 1,000 dollars of Bob’s deposit in his reserve just in case he would want to withdraw some of it out. These reserves are called vault cash.
When Bob checks his bank account, he will see 1,000 dollars in his account even if ACME Bank loaned out 90 dollars to Mary. This is because ACME Bank left an IOU it created called bank credit in Bob’s account.

As stated by the Federal Reserve Bank of NYC “Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU”.

Going back to our example, people take out loans for different reasons. However, in Mary’s case, the 9,000 dollars she borrowed was used to buy a used car from Alice. Alice then deposits the 9,000 dollars into her bank account at ACME Bank and in turn the bank loans out 8,100 dollars (90% of 9000) to Steve. With just those transactions, ACME Bank has created an additional 17,100 dollars all backed by 10,0000 dollars. This process continues over and over again creating bank credit all the way. In addition, this is where the vast majority of our currency supply comes from as the majority of the currency creation is created by the banking system.

As we learned in our inflation article, inflation is the expansion of the currency supply and increases in prices for goods and services are the result of it.

Taxes

As we learned in our money article, we give currency its value. We also work hard so we can earn and save that currency so we can pay the Internal Revenue Service (IRS) in the US. Did you know that much of the taxes we pay are not used for public education, national infrastructure, or the public needs, but instead to pay interest on the treasury bonds that the Federal Reserve bought with a check drawn on an account that has nothing on it? Doesn’t this sound fraudulent?

In addition, the Federal Reserve was created in 1913, the very same year the constitution was amended to allow income tax on individuals and businesses. The income tax you have paid over the years has been benefiting the “owners” or “stakeholders” of the system.

Debt Ceiling Delusion

Our national debt ceiling is way too high that there is not enough currency to pay down the debt ceiling.

The debt ceiling is a limit imposed by Congress on the amount of debt that the federal government can have outstanding. The problem is that once the debt limit is reached, the Federal government cannot increase the amount of outstanding debt as it can only draw from the currency on hand. In addition, there is never enough currency to pay down the debt ceiling. For example, creating additional currencies requires you to borrow it into existence as you promise to pay it back in the future. In Michael Mahoney’s Hidden Secrets Money, he provided an example of how there can never be enough currency in existence to pay off the national debt. For example, if you borrow the very first dollar into existence and that is the only dollar that exists, and you promise to pay it back plus interest where do you get the second dollar? That will require you to borrow that dollar into existence. There is always more debt in the system than there is currency in existence to pay the debt and therefore the system is impossible. Our monetary system is designed to ever increase the levels of debt and that is why politicians will always continue to push to raise the debt ceiling.

The Federal Reserve Bank of Saint Louis quoted “the decrease in purchasing power incurred by holders of money due to inflation imparts gains to the issuers of money”. What this means is that inflation causes price increases for goods and services because the currency has lost purchasing power but also provides substantial monetary gains to the issuers (creators) of money. Our monetary system is nothing but a form of legalized theft, ponzi scheme, and scam.

Investors Payout

As mentioned above, the Federal Reserve is not a federal government agency as it has “stockholders or investors. The stockholders represent a percentage of ownership in a corporation. With that being said, the Federal Reserve is a private corporation with owners and investors that are entitled to receive an annual dividend (Figure 1). So who are the stakeholders/investors? Our guess is that the banks who bought the Treasury bonds are the stakeholders that get to make a profit by sharing them with the federal reserve for nothing.

As John Maynard Kayes has said “By this means the government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft”.

Figure 1 - Paid Dividends

Summary

The following graphically summarizes the discussion above (Figure 2). The ability to create currency out of thin air has negative impacts on the purchasing power of the US dollar. As Peter Schiff quoted “Printing money is like taxation in another form”. The only way to protect our wealth from this scam is to invest in assets.